MIDAS SHARE TIPS UPDATE: Great pedigree – but it’s time to sell Dechra
Midas watchers have done well out of Dechra Pharmaceuticals, the Cheshire-based veterinary drugs business that makes everything from cats’ thyroid pills to horse painkillers.
Since Midas first tipped the shares at £3.97 in 2008, they’ve soared to £49.74 – rising £15.44 since we last looked at the stock in February and urged even the most ardent profit takers to retain some of their shares.
This week’s full-year figures show that the petcare stock is still a Very Good Boy indeed, mainly due to the fact that we’ve all bought pets during the pandemic.
Cautious: While Dechra is continuing to benefit from our pandemic pet buys, some analysts are beginning to worry that the future may not be quite as rosy as it has been
Strong double-digit growth and a hike in the dividend had tails wagging, with revenues from Companion Animal Products (that’s pets to you and me) up 26 per cent, well ahead of expectations.
While Dechra is continuing to benefit from our pandemic pet buys, some analysts are beginning to worry that the future may not be quite as rosy as it has been. Liberum analyst Charlie Campbell has a ‘sell’ on the stock, despite the strength of the business.
‘Covid has lifted the entire companion animal market, with pet ownership and spend per pet on the rise. However, we question its sustainability,’ he says.
There are some early signs of softening. Dechra chief executive Ian Page flagged a decline in the number of vet visits in the US, while Dechra’s rival Zoetis has also reported some slowing and said it expects the high growth trend to moderate going forward.
These are small quibbles. The company’s performance remains strong, and the 18 per cent increase in the dividend is welcome.
But the shares now trade on a hefty 40 times forward earnings, which is hard to justify, and even with the dividend increase they yield less than 1 per cent.
Midas verdict: There’s no doubt Dechra has a fantastic pedigree. It is a well-run business and has taken advantage of a pandemic-fuelled boom in companion animals as well as making some well-timed acquisitions.
But no matter how much we love our pets, there is a limit to how much we are prepared to spend, and Dechra is now very highly rated. There’s not much margin for error. Midas readers have made huge profits on this stock and it’s now time to sell.